Letitia James was a participant in the New York City Campaign Finance Program (the "Program") in connection with her campaign for City Council, District #35, in the 2001 elections, and received $75,350 in public funds. At a meeting held on September 12, 2003, the New York City Campaign Finance Board (the "Board") assessed a $28,744 penalty for exceeding the $137,000 expenditure limit applicable to Program participants in the 2001 City Council primary elections by $14,372 (10.5%). The Board has determined to issue a numbered determination in connection with this Final Determination to give participating candidates generally the benefit of one detailed account of the Board's and Board staff's evaluation of claimed exempt expenditures.
The expenditure limitations contained in the New York City Campaign Finance Act (New York City Administrative Code§§3-701, et seq.) (the "Act") serve the important purpose of "leveling the playing field," and indeed may be the most important factor in overcoming a disparity of resources between serious candidates. As a result, the Program's requirements for expenditure limit compliance are detailed, the Board enforces them rigorously, and the penalties for violating the expenditure limits may be significant.
Applicable Law and Rules
Administrative Code §3-706(4), as in effect for the 2001 elections, provided as follows:
"[e]xpenditures made for the purpose of complying with the provisions of this chapter or the election law, including legal fees, accounting fees, the cost of record creation and retention, and other necessary compliance expenditures, and expenses to challenge or defend the validity of petitions of designation or nomination or certificates of nomination, acceptance, authorization, declination or substitution shall not be limited by the expenditure limitation of this section."
The burden is always on the candidate to substantiate exempt expenditures. See, e.g., Rule 1-08(l). The rule provides two alternative methods for meeting this burden: (i) submit a methodology to the Board for approval in advance of making expenditures that exceed the expenditure limit detailing how the campaign intends to allocate its expenditures to exempt purposes; or (ii) "maintain records that demonstrate that each individual expenditure claimed as exempt is exempt." (Emphasis added.)
Advisory Opinion No. 1996-1 (April 4, 1996), providing a "comprehensive summary of what is an exempt compliance cost," detailed the following as exempt "compliance expenditures" (other exempt expenditures, such as to challenge or defend the validity of petitions, were not construed by the Opinion):
Compensation paid to attorneys and their support staff only "to the extent it is attributable to counsel or representation that is directly connected with the campaign's duty to comply with the Campaign Finance Program requirements or New York State Election Law."
The cost of preparing financial disclosure statements and creating and retaining records, provided the records are not otherwise kept pursuant to standard practices.
The cost of circulating and filing petitions.
Overhead costs if incurred in support of exempt compliance activities described in 1 through 3 above. If overhead costs are only partly for compliance, "the campaign must be prepared to propose to the Board a reasonable allocation for what percentage is exempt. The Board will determine what portion, if any, may properly be claimed as an exempt compliance cost."
Finally, in reiterating the requirements of Rule 1-08(l), the Advisory Opinion stated that "[t]he burden is on the campaign to show that an expenditure is exempt," and further stated that "[t]o meet this burden, the participating candidate's committee must keep very detailed records." (Emphasis added).
Rule 3-03(e) requires participants to claim exempt expenditures contemporaneously, in the disclosure statement in which the expenditure is reported. The rule is intended to help ensure the accuracy of exempt claims, and, as well, to prevent the creation of exempt purposes for expenditures after the fact and to prevent campaigns from "backing into" a specific dollar amount in exempt expenditures after the fact in an attempt to avoid an expenditure limit violation.
As a sui generis addition to exempt expenditures in 2001, Advisory Opinion No. 2001-12 (September 20, 2001) provided that, among other things, "payments made to replicate election day goods and services actually received by the campaign on September 11, 2001, or which would have been received on that date had the World Trade Center tragedy not occurred," would be exempt from the expenditure limits. This advisory opinion was based, in part, on the reasoning that candidates who budgeted their expenditure limit compliance and spent funds expecting that the primary election would in fact take place, as scheduled, on September 11, should be permitted to spend equivalent funds on the September 25 primary date without risk of violating the expenditure limit. To fall within the ambit of the opinion's exception, however, expenditures must replicate expenditures actually made, whether or not the goods or services were actually received; they may not be new expenditures.
While for other violations, the Board's authority to assess a penalty is limited to $10,000, Administrative Code §3-711(2)provides that the Board may assess a penalty of up to three times the amount by which a participant exceeds the applicable expenditure limit. This added authority reflects a heightened concern about expenditure limit violations. While the benefits obtained from other violations may be eliminated or cured (such as by refunding an impermissible contribution), the benefits of exceeding the expenditure limits, which can be substantial, may not be undone or otherwise corrected. Similarly, the opponents of a candidate who exceeds the expenditure limit have no recourse to level the playing field, particularly when a candidate exceeds the limit in the final days prior to an election.
The Importance of Documentation
The success and integrity of the Program is dependent on participant compliance with the Program's substantive rules and requirements, and upon the accuracy of the participants' disclosure statements. Central to verification of participant compliance with both the substantive requirements of the Program and with the disclosure requirements is the Board's audit authority, which relies in turn upon participants' production of their own and third parties' contemporaneous, detailed documentation - including invoices, cancelled checks, and contracts - to verify participants' statements, in disclosure statements and elsewhere, regarding campaign activities. Without this documentation, the Board cannot effectively audit a participant's compliance with, and thus the integrity of, the Program. When verification is not possible, the public is robbed of its right to have confidence in the expenditure of tax dollars and in the candidates' conformance to their responsibility to the public, and opposing candidates are robbed of the "even playing field" they are promised by their and their opponents' participation in the Program.
With respect to exempt expenditures, for candidates who do not choose a methodology, adequate, detailed contemporaneous documentation of these expenditures is the only basis on which the Board can hope to perform audits sufficient to offer the public and opposing candidates a high degree of confidence that participants are complying with the expenditure limits. Otherwise, the Board has no way to verify the validity of millions of dollars of exempt expenditures, inviting carelessness and inaccuracy, misuse, and misrepresentation with respect to adherence to the expenditure limits.
As a result, the Board has consistently placed a very high value on candidate compliance with the recordkeeping requirements of the Act and the Board's Rules as an essential means to carry out the Board's mandate to maintain a level playing field. The vast majority of Council candidates do not have gross expenditures that exceed the expenditure limit, and thus do not trigger an inquiry into exempt expenditures. Among the small number of candidates who do have gross expenditures above the limit, most have adhered to the record-keeping requirements of the Program or supplied an acceptable methodology, and very few are therefore found to be in violation of the expenditure limits.
The Committee's Expenditures
The Committee did not choose to submit a methodology pursuant to Rule 1-08(l) to substantiate exempt expenditures before making exempt expenditures. Therefore, the Committee was required to submit very detailed documentation to substantiate its claims. As explicitly stated in Rule 1-08(l) and Advisory Opinion No. 1996-1, the burden is on the candidate to submit satisfactory documentation. This documentation must be sufficiently detailed for the Board to determine, without guesswork or supposition, that an expenditure was actually made for a purpose permitted as exempt. It is not incumbent upon the Board to supply an exempt purpose for a campaign or to extrapolate from insufficient documentation. If the candidate does not meet its burden for a particular expenditure, the expenditure is not exempt.
As noted above, the expenditure limit applicable to the 2001 primary elections for City Council was $137,000. The Committee reported $184,233 in expenditures and claimed $37,233 in expenditures as exempt as of the January 15, 2002 post-election filing. Thus, even if one accepted the Committee's claims made on the face of its disclosure statements shortly after the election, the Committee exceeded the expenditure limit by $10,000. The Committee also made but failed to report an additional $2,517 in expenditures. Thus, in order to avoid an expenditure limit violation, it appeared at the commencement of the post-election audit that the Committee would have to substantiate through detailed documentation $49,750 in exempt expenditures (or 27% of its gross expenditures).1
Through various submissions and amendments, the Committee made showings sufficient to decrease the figure for its total spending and establish certain claimed expenditures as exempt. Thus, after the Committee's response to the Notice of Recommended Penalties, it appeared that the Committee had spent $176,6972, of which $25,325 was found by Board staff to be properly documented as exempt, so that the $137,000 expenditure limit was exceeded by $14,372. It is this sum that is at issue before the Board. The Board received voluminous documentation, heard oral argument, and deliberated with the benefit of the papers and arguments on this matter.
Although the Board does not anticipate generally providing a narrative analysis of campaign records, in this instance a detailed review of the documentation submitted to substantiate exempt claims but not accepted is attached.
The Committee has not established exempt expenditures for the items at issue, in part because certain of the purposes for the expenditures are not exempt purposes and in part because the documentation was not sufficiently detailed. As a result, the Committee has exceeded the $137,000 expenditure limit applicable to the primary election by $14,372.
It should be noted that the 2001 primary election for City Council, District #35 was a close race, with James Davis receiving 6,691 votes and Ms. James receiving 5,746 votes. The Committee did not submit an exempt expenditure methodology for pre-approval, has claimed an unusually large number of expenditures as exempt from the expenditure limit, did not make a number of these claims contemporaneously, submitted insufficient documentation for many expenditures, and asserted as exempt certain expenditures which are on their face not exempt. Upon review, the Board concludes that there is no reason to disagree with the Board staff's recommendation that the standard penalty of two times3 the amount of the violation, or $28,744, is appropriate.
NEW YORK CITY
CAMPAIGN FINANCE BOARD
Letitia James Expenditure Limit Analysis
Expenditures not Accepted as Exempt
A. Non-Exempt Purposes.
Replication of September 11, 2001 Election Day Expenditures ($4,290): Pursuant to Advisory Opinion No. 2001-12, expenditures for the September 25, 2001 primary election are considered replication of election day expenditures, and therefore not subject to the expenditure limit, only if there is replication of expenditures actually made for September 11, 2001 primary election expenditures. The $4,290 in expenditures claimed for cash withdrawn on September 11 but not used until September 25 to pay election day workers did not replicate other expenditures actually made for September 11, 2001 primary election day expenditures, and thus they are not exempt from the expenditure limit.
Paul Wooten ($2,500): The Committee claims $2,500 in expenditures to Paul Wooten related to poll watching activities as exempt. Poll watching is not an exempt activity, so these expenditures to Mr. Wooten are not exempt. Administrative Code§3-706(4); Board Publication "Exempt Expenditures."
Branford Communications ($1,578) and Astoria Graphics ($1,013): The Committee asserts that these expenditures are exempt because they were made to produce literature used in connection with petitioning. However, an expenditure for literature related to petitioning is not a required compliance expenditure, and thus is not an exempt expenditure pursuant to Administrative Code §3-706(4).
Primary Election Day Workers ($950): The Committee asserts that 50% of $1,900 in expenditures for primary election-day workers is exempt because these workers spent 50% of their time as poll watchers and 50% of their time handing out literature. As noted above, poll watching is not an exempt activity.
La Cuisine Gourmet Catering ($650): The Committee asserts that 50% of its expenditures for food for primary election day workers are exempt because 50% of the workers' activities are exempt for poll watching. However, as described above, the workers' activities are not exempt, and thus the related food expenditures are not exempt.
B. Failure to Provide Adequate Documentation
Service Resources ($47), Verizon ($280 and $223), Voicestream ($142 and $58), Court St. Supplies ($63), Insite East LLC ($837): The Committee states that because the petitioning period accounts for 37 of the 119 days (May 15-September 11) between the Committee's arranging for office space and the original primary day, and the Committee did no other activity during this period but petitioning, all expenditures during this period are exempt. Since 37 equals 31% of 119, the Committee claims 31% of its overhead expenditures during the period between May 15 and September 11 as exempt. First, the Committee did not submit this methodology to the Board in advance of the expenditures. The Committee's methodology, which assumes that the only activity during the petitioning period was petitioning, is unreasonable on its face. Indeed, had the Committee chosen to substantiate exempt expenditures through submission of a methodology as opposed to detailed documentation, an assertion that 31% of the Committee's overhead would be claimed as exempt likely would have been rejected by the Board staff. The burden is on the Committee to establish exempt expenditures. Since the Committee chose to meet this burden through the submission of documentation as opposed to a pre-approved methodology, the Committee must submit documentation and information sufficiently detailed for the Board staff to determine, without guesswork or supposition, that an expenditure had an exempt purpose. In this instance, the Committee has not provided the Board with a credible explanation for its exempt expenditure claims. The Committee has not met the burden placed on it, and thus these expenditures are not exempt.
Denise Mann ($145, $22), Traci Harrison ($62): The Committee asserts that 10% of the activities of Ms. Mann and Ms. Harrison constituted exempt purposes, and thus 10% of the expenditures to Ms. Mann and Ms. Harrison are exempt. However, the documentation submitted by the Committee does not indicate any activities, exempt or otherwise, that these individuals performed, so the Board cannot determine if 10% is a proper allocation. Since the Committee was unable to substantiate these exempt expenditure claims, these expenditures are not exempt.
Cecilia Lites ($680): Ms. Lites provided accounting services to the Committee. The Committee asserts that 85% of the Committee's expenditures to Ms. Lites had exempt purposes. However, as with Ms. Mann, the Committee has not provided any documentation substantiating this allocation, and indeed according to invoices for Ms. Lites, many of the services she performed do not have exempt purposes. As a result, the Board cannot determine whether 85% is a proper allocation. Since the Committee was unable to substantiate this exempt expenditure claim, these expenditures are not exempt.
Phyllis Shelton ($5,000): Ms. Shelton was a consultant to the Committee. The Committee asserts that 40% of Ms. Shelton's activities had exempt purposes, and thus 40% of the expenditures to Ms. Shelton are exempt. However, the documentation submitted by the Committee, while showing that Ms. Shelton engaged in some exempt activities, does not indicate in any way the time Ms. Shelton spent on the various activities she performed on behalf of the Committee. Therefore, the Board cannot determine whether 40% is a proper allocation. Since the Committee was unable to substantiate this exempt expenditure claim, the expenditures are not exempt.
Gail Kearney ($840): As with Patricia Baker, the Committee asserts that Ms. Kearney researched voter records for a designating petition challenge. However, the documentation submitted indicates that Ms. Kearney "research[ed] voting records" from August 1 to August 17, when the deadline for petition challenges was July 23. This expenditure is not exempt.
Patricia Baker ($200): The Committee asserts that this expenditure was made to research voter records for designating petition challenges. The invoice is dated August 7, 2001, but the deadline to submit specified petition challenges to the Board of Elections was July 23, 2001, and petition hearings concluded for the 35th Council District on August 1, 2001. The documentation submitted by the Committee is not sufficient to substantiate this exempt expenditure claim.
Exempt Advances ($1,106): The Committee claims $1,662 in exempt advances. Of this $1,662, the Board considers petitioning expenses of $556 as legitimately exempt from the expenditure limits. The remaining $1,106 is constituted by overhead costs during the petition period, food for petition volunteers, and a voting records research expenditure to Gail Kearney. The Committee's assertion that all expenses made during the petition period are exempt belies logic, and thus the Committee has not submitted documentation sufficient to establish these expenditures as exempt. Food for petition volunteers is not an exempt expenditure pursuant to Administrative Code §3-706(4). Regarding the expenditure to Ms. Kearney, the documentation is not sufficient to establish that this expenditure is exempt.
Exempt Petty Cash ($34): The Committee claims $34 in exempt petty cash expenditures. However, $18 of these expenditures are for office supplies purchased during the petitioning period, and as with other claims during petitioning period, this claim is based on the theory that all Committee activities during this period had an exempt purpose. As a result, this $18 is not exempt. The other $16 in petty cash expenditures was for food for a party for petition volunteers. Food for petition volunteers is not an exempt expenditure pursuant to Administrative Code §3-706(4).
Additional Exempt Expenditure Claims
The Committee asserts that $3,895 in additional exempt expenditure claims should be considered. However, these expenditures - $1,445 to Mayra Bell on November 30, 2001 and $2,450 to Paul Wooten and on December 5, 2001 - occurred after the date of the primary election. Thus, the expenditures themselves are not subject to the $137,000 primary election expenditure limit and were therefore not included in the total of $184,233 in total expenditures against which the Board evaluated exempt expenditures.
1 This percentage in claimed exempt expenditures is extremely high. Among those participants who claimed exempt expenditures, the average claimed in 2001 was approximately 5% of gross expenditures. Local Law No. 12 of 2003, which amended the Act to provide a safe harbor from the Act's detailed documentation requirements, placed the figure for a "reasonable" amount for exempt expenditures at only seven and one-half percent of the applicable expenditure limit. Administrative Code §3-706(4)(c).
2 The Committee reported $177,887 in expenditures, including a $1,190 expenditure refund misreported as an "other receipt."
3 See, e.g., the Una Clarke 1997 City Council primary election expenditure limit violation determination. See also the Board's 2003 Council District Elections Guidelines for Staff Recommendations for Penalty Assessments for Disclosure Statement and Contribution Violations.